Calomiris, Longhofer, and Miles report:
We conclude that declines in house prices are highly likely to remain
small. Our analysis reveals, unsurprisingly, that foreclosures and home
prices have negative effects on each other over time, but this does not
imply a vicious cycle of collapsing prices. Our models predict that as
foreclosures continue to climb in many states, house prices will remain
flat or decline in those states — but will not collapse...the effect of foreclosure shocks on
house prices is small. Furthermore, other fundamental factors (such as
employment growth and a slowing of the growth of the housing supply
over the past year and a half) will cushion the impact of foreclosures.…Even under an extreme
worst-case scenario for foreclosures…U.S.
house prices just aren’t going to fall by very much in the next two
years. In our worst-case scenario, the average cumulative decline is
about 5 percent, and only 12 states experience declines greater than 6
percent by the end of 2009.
There is more at the link, including a claim that the Case-Shiller index is unrepresentative. Here’s another report, which does not literally contradict the first:
The percentage of mortgages in arrears in the category of loans one
rung above subprime, so-called alternative-A mortgages, quadrupled to
12 percent in April from a year earlier. Delinquencies among prime
loans, which account for most of the $12 trillion market, doubled to
2.7 percent in that time.
In other words, you can be an optimist about agency bail-outs, and a pessimist about the financial pain that many Americans will suffer.
What percent of people in California, Florida, and Nevada can afford a median priced home using a conventional 30 year fixed loan?
It was about 16% in California. At least that is the last figure I read. That statistic will greatly affect home prices. If few people can afford to buy homes, prices will continue to fall.
Real estate markets are by definition local, so national figures are of relatively limited value. What matters are trends in your area.
I only speak for the San Diego market, but at the peak in 2005 about 6% of households could afford a median home. Without liar loans, teaser rates, neg am and zero down/zero closing costs loans nobody would have been purchasing homes here. Now, it’s become obvious that many people who received those loans can’t pay it back unless they can sell their house for significantly more than they paid for it. Inflation itself will depress home prices (less $ to spend on a home) unless we see the corresponding wage inflation as well. More than likely it will be at least a decade before we see home prices reach the 2005 peak nominally again.
The authors seem to believe that excluding jumbo loans somehow makes the data more relevant to average Americans. Maybe in Kansas, where 2 of the authors are from. In most of the major metro areas, you cannot buy a small cottage without a jumbo loan: I should know, as I live in what was meant to be affordable housing for returning WWII veterans, but is now priced at ~600k. See also comments re housing affordability in other markets.
The decline in median price of home sales in California from June 2007 to June 2008 was 31.7%.
At the peak, only 1.7% of the households in Los Angeles had the incomes to buy the median home under traditional measures of affordability.
So wait a minute, we should ignore case-shiller, because it only includes 79% of the housing market, and we should pay attention to OFHEO’s index even though it ignores subprime loans, because it includes “more than three-quarters of US homes.”
Right.
Oh, and employment growth will cushion any fall in housing prices.
Wow, how could I forget about the phenomenal job growth we are having.
I don’t know what everyone is so worried about.
This criticism misses the mark about the Case-Shiller index. Case-Shiller was constructed to provide a consistent time-series for home prices so that you could compare prices in 1980 to prices in 2007 and not be comparing apples to oranges.
If you take broad averages, of course things are going to look rosier. That’s because as housing prices rise, first-time buyers will be more likely to buy in the distant suburbs and exurbs where prices are cheaper. Those transactions will tend to drag down the average home price. Also, developers will start to build on cheap land with cheap building materials (and cheap immigrant labor) to compete on price. These two factors tend to lower the average but the resulting number says nothing about whether there is a housing bubble or not since it will include new homes and homes built on cheap land.
Case-Shiller isn’t representative and was never meant to be. It is meant to compare prices across time without the biases mentioned above.
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